<PAGE>
AVALON CAPITAL, INC.
SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 22, 1995
FOR NEW JERSEY RESIDENTS ONLY
Avalon Capital, Inc. may invest in options in order to hedge against the risk
of changes in the market value of securities that it holds, or intends to
add, to its portfolio. Officials in the New Jersey Bureau of Securities
believe that these investments are "derivatives," that shares of the Fund may
therefore be considered speculative and that an investment in the fund may
involve significant risks. The Company's use of options to hedge against
risk, and the risks associated with these instruments, are discussed on pages
9 and 10 of the prospectus.
February 9, 1996
<PAGE>
PROSPECTUS
AVALON CAPITAL, INC.
[LOGO]
3,000,000 SHARES OF COMMON STOCK
------------------
Avalon Capital, Inc. (the "Company") is a non-diversified closed-end
management investment company. The Company's primary investment objective is
long-term capital appreciation. The Company will seek to achieve its objective
by investing in a portfolio of securities that possess fundamental investment
value and may be purchased at a reasonable cost. There is no assurance that the
Company will achieve its objectives. See "The Company and its Objectives,
Policies, and Risks."
Hutner Capital Management, Inc. ("Hutner Capital Management") is the
Company's investment adviser. The address of the Company and Hutner Capital
Management is 14 Wall Street, New York, New York 10005-2133, and its telephone
number is (212) 577-8400. Forum Financial Services, Inc. ("Forum") is the
Company's administrator. The address of Forum is Two Portland Square, Portland,
Maine 04101, and its telephone number is (207) 879-0001.
Prior to this offering, there has been no public market for the common stock
of the Company. The Company has filed an application for listing of its common
stock on the Nasdaq National Market. There is no assurance that the Company's
application will be approved prior to the completion of the initial offering
period. In such event, there will not be a secondary trading market for the
Company's common stock, and it will be illiquid pending approval of the listing
by Nasdaq.
To provide additional shareholder liquidity, the Company has adopted a
fundamental policy that requires it to make an annual repurchase offer to
purchase a specified percentage (currently 5%) of the company's outstanding
shares at the then-current net asset value. The initial repurchase offer will
occur in February, 1996. The Company may also, at its sole discretion, sell
additional shares on its annual repurchase date. See "Repurchase Offers."
The Company's common stock is being offered and sold by the Company through
broker-dealers, including Forum Financial Services, Inc. (the "Distributor"),
that are members of the National Association of Securities Dealers, Inc. The
Distributor and the other broker-dealers will be offering and selling the
Company's common stock on a "best-efforts" basis. No arrangement has been made
to place funds received in an escrow, trust, or similar arrangement. It is
anticipated that this offering will terminate on October 31, 1995.
<TABLE>
<CAPTION>
PRICE TO PROCEEDS TO
PUBLIC (1) SALES LOAD COMPANY (2)
<S> <C> <C> <C>
Total Minimum...................................... $10.00 $0 $10.00
Total Maximum...................................... $30,000,000.00 $0 $30,000,000.00
</TABLE>
(1) The shares are being offered on a "best-efforts" basis at a price equal to
net asset value, which as of the date of this prospectus is $10.00 per
share, without a sales charge.
(2) Before deducting offering expenses payable by the Company estimated at
$33,500.00. These expenses will be amortized over a five year period and
charged as expenses against the income of the Company, assuming that all
shares currently registered are sold.
--------------------------
The Prospectus sets forth concisely information about the Company that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus carefully and retain it for future reference. A Statement
of Additional Information about the Company has been filed with the Securities
and Exchange Commission and is available, without charge, upon writing or
calling Forum at the above location. The Statement of Additional Information has
been incorporated by reference into this Prospectus. The table of contents of
the Statement of Additional Information appears on page 22 of this Prospectus.
------------------------
INVESTORS SHOULD BE AWARE THAT SHARES OF A CLOSED-END EQUITY FUND TEND TO
TRADE FREQUENTLY AT A DISCOUNT. ACCORDINGLY, AN INVESTOR WHO PURCHASES THE
COMMON STOCK OF THE COMPANY IN THIS INITIAL PUBLIC OFFERING MAY HAVE A RISK OF
LOSS TO CAPITAL WHEN SUCH SHARES COMMENCE PUBLIC TRADING.
The date of this Prospectus and the Statement of Additional Information is
September 22, 1995.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FORUM FINANCIAL SERVICES, INC.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.
<TABLE>
<S> <C>
THE COMPANY....................... Avalon Capital, Inc. (the "Company") is a newly
organized non-diversified closed-end management
investment company. See "The Company and its Objectives,
Policies and Risks."
THE OFFERING...................... The Company is offering and selling up to 3 million
shares of its common stock through registered
broker-dealers including Forum Financial Services, Inc.
(the "Distributor") on a "best-efforts" basis at an
offering price of $10.00 per share, without a sales
charge. See "Plan of Distribution."
INVESTMENT OBJECTIVES............. The Company will seek to achieve its objectives by
investing in a portfolio of securities that possess
fundamental investment value and may be purchased at a
reasonable cost (the "Business Valuation Approach"). In
applying the Business Valuation Approach, the investment
adviser will: (1) view each investment as a business;
(2) think independently; (3) emphasize high returns; (4)
seek sustained business excellence; (5) seek businesses
that consider shareholder interests; (6) seek to pay a
reasonable price; and (7) invest for the long term. See
"The Company and its Objectives, Policies and Risks."
INVESTMENT ADVISER................ Hutner Capital Management, Inc. ("Hutner Capital
Management" or the "investment adviser") will act as the
Company's investment adviser. The Company will pay
Hutner Capital Management a monthly fee at an annual
rate of 1% of the average weekly net assets of the
Company. This fee is higher than that paid by many other
investment companies. Hutner Capital Management was
founded in 1995.
Hutner Capital Management may from time to time contract
with other service providers to perform support services
that aid Hutner Capital Management advise the Company.
These agreements will be subject to the approval of the
Company's Board of Directors and will comply with
applicable law. At this time, Hutner Capital Management
has entered into an Investment Research Agreement with
Pulsifer and Hutner Incorporated, an organization that
is affiliated with Hutner Capital Management. See
"Management of the Company."
ADMINISTRATOR..................... Forum Financial Services, Inc. ("Forum") will act as the
Company's administrator. The Company will pay Forum a
monthly fee at an annual rate of .25% of the average
weekly net assets of the Company, subject to an annual
minimum fee of $25,000. See "Management of the Company."
DISTRIBUTIONS..................... The Company's policy is to distribute to its
shareholders all of its net investment income and net
realized capital gains, if any, for each year. All
distributions to shareholders whose shares are
registered in their own names will be automatically
reinvested in additional shares of the Company, unless
they elect to receive cash. Shareholders whose shares
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
are held in the name of a broker or nominee should
contact such broker or nominee to determine whether or
how they may participate in the Company's dividend
reinvestment plan. See "Taxes" and "Automatic Dividend
Reinvestment Plan."
ESTIMATED EXPENSES................ The Company's annual operating expenses, including
advisory and administrative fees and other expenses
(excluding interest expenses), based on net assets of
$20 million, are estimated to be approximately $370,000
(1.85% of net assets) in its first full year of
operations. The Company's organizational expenses are
estimated to be $95,500.00 and will be amortized over a
period not to exceed 60 months from the date the Company
commences operations. See "Summary of the Company's
Expenses" and "Management of the Company."
REPURCHASE OF SHARES.............. Beginning in February, 1996 and each February
thereafter, the Company will make an annual repurchase
offer to purchase a specified percentage (currently 5%)
of the Company's outstanding shares at the then-current
net asset value. The company may also, at its sole
discretion, sell additional shares on its annual
repurchase date. See "Repurchase Offers."
LISTING........................... The Company has filed an application for listing its
common stock on the Nasdaq National Market. There is no
assurance that this application will be approved prior
to the completion of the initial offering period. In
such event, no secondary trading market will develop and
the Company's common stock will be illiquid pending
approval by Nasdaq of the listing application.
</TABLE>
3
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SPECIAL RISK CONSIDERATIONS
An investment in the Company's common stock cannot be considered a complete
investment program. Because the Company's investment portfolio will be
non-diversified, the shares may be subject to greater risk than the shares of a
closed-end investment company whose portfolio is diversified.
Shares of a closed-end equity fund tend to trade frequently at a discount.
Accordingly, an investor who purchases the common stock of the Company in this
initial public offering may have a risk of loss to capital when such shares
commence public trading.
In the event that the Company's application for listing on the Nasdaq
National Market is not approved, no secondary trading market will develop and
the Company's common stock will be illiquid.
The Articles of Incorporation of the Company include certain "anti-takeover"
provisions requiring the approval of three-quarters of the outstanding voting
stock for certain transactions. In addition, the Articles of Incorporation
provide that the Board of Directors is to consist of three classes of directors,
one class to be elected each year. These provisions and others in the Articles
of Incorporation could have the effect of depriving stockholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging third parties from seeking to gain control in a tender offer, proxy
contest or similar transaction. See "The Company and its Objectives, Policies
and Risks" and "Capital Stock of the Company."
4
<PAGE>
SUMMARY OF THE COMPANY'S EXPENSES
The expense summary below was developed to help you make your investment
decisions. You should consider this expense information along with other
important information in this Prospectus, including the Company's investment
objective.
A. SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price) None
B. ESTIMATED ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
<TABLE>
<S> <C>
Advisory Fees................................................................ 1.00%
Administration Fees.......................................................... 0.25%
Other Expenses............................................................... 0.60%
----
Total Estimated Annual Expenses.............................................. 1.85%
----
----
</TABLE>
C. EXAMPLE:
The purpose of the following table is to assist you in understanding the
various costs and expenses that an investor in the Company would bear directly
or indirectly. You would pay the following expenses on a $1,000 investment in
the Company, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
--------- ---------
<S> <C>
$19.00 $58.00
</TABLE>
A. SHAREHOLDER TRANSACTION EXPENSES represent charges paid when you purchase
shares of the Company.
B. ESTIMATED ANNUAL EXPENSES are based on the Company's anticipated expenses
for the current fiscal year, assuming net assets of $20 million. "Other
Expenses" are based on estimated amounts for the current fiscal year.
C. THE EXAMPLE OF EXPENSES is a hypothetical example that illustrates the
expenses associated with a $1,000 investment in the Company over periods of one
and three years, based on the estimated expenses in the above table and an
assumed annual rate of return of 5%. THE 5% RETURN AND EXPENSES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESSER THAN THOSE SHOWN.
5
<PAGE>
THE COMPANY AND ITS OBJECTIVES, POLICIES AND RISKS
THE COMPANY
The Company is registered as a closed-end, non-diversified management
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), that was incorporated on March 14, 1995 under the
laws of the State of Maryland. The Company's primary investment objective is to
provide investors with long-term capital appreciation by investing in a
portfolio of securities that possess fundamental investment value and may be
purchased at reasonable cost. No assurance can be given that the Company's
investment objective will be achieved.
USE OF PROCEEDS
The net proceeds of this offering, after deduction of the organizational and
offering expenses (estimated to be $129,000.00), will be invested in accordance
with the policies set forth below under "Investment Objectives and Policies." A
portion of the organization and offering expenses of the Company has been
advanced by the Adviser and may be repaid by the Company upon closing of this
offering.
The Company estimates that the net proceeds of this offering will be fully
invested in accordance with the Company's investment objectives and policies,
within six months of this initial offering. Pending such investment, the
proceeds may be invested in U.S. Government securities, investment grade
short-term money market instruments or other short-term securities issued or
guaranteed by banks.
INVESTMENT OBJECTIVES AND POLICIES
The Company's primary investment objective is long-term capital
appreciation. The Company will seek to achieve its objectives by investing in a
portfolio of securities that possess fundamental investment value and may be
purchased at a reasonable cost (the "Business Valuation Approach").
In applying the Business Valuation Approach, the investment adviser will
follow these investment principles:
-VIEW EACH INVESTMENT AS A BUSINESS. In selecting securities, the investment
adviser views common stock and other equity securities as units of
ownership of a business as a going concern. Consistent with this view, the
investment adviser will focus on businesses which he believes will generate
high returns. In evaluating the potential future returns of a business, the
investment adviser will, in general, give little weight to current market
perceptions. Rather the investment adviser will consider such factors
relating to a company as financial statements, profitability, return on
equity, cash flow, asset values and the investment adviser's perception of
management's expertise.
-THINK INDEPENDENTLY. The investment adviser is wary of the irrational
emotions and actions that periodically sweep through Wall Street and thus
will generally avoid popular investment ideas. The investment adviser will
base his investment decisions on the quality of a business, not its
popularity. He will attempt to identify companies that he believes have,
for one reason or another, been misappraised by the market.
-EMPHASIS ON HIGH RETURNS. Whether buying publicly traded stock or
securities of a private company, the investment adviser will be always
conscious of the Company's role as a business owner. Investment gains over
the long run are determined by the return that a business earns on its
owners' capital and the price paid to become an owner. The investment
adviser considers a good measure of earning power to be a high return on
equity (net profits divided by common equity) sustained over a period of
time. Thus, the investment adviser will look for companies that
consistently post a return on equity of 15-50% or more. Another measure of
profitability the investment adviser will use is the cash generated by the
business. The investment adviser will focus on businesses that do not
require significant capital expenditures.
6
<PAGE>
-LOOK FOR SUSTAINED BUSINESS EXCELLENCE. Sustained business excellence is
often due to some competitive advantage that allows a business to earn an
unusually high rate of return consistently over long periods of time. The
investment adviser will focus on companies with a clear business franchise,
or competitive advantage in their market, due to factors such as industry
structure, government regulations, superior management, and favorable
reputation of services or products. In addition, these companies normally
must display a proven record of healthy earnings growth.
-INTEREST IN BUSINESSES THAT ARE RUN WITH THE SHAREHOLDERS IN MIND. The
investment adviser favors companies where management treats shareholders as
partners by, for example, providing excellent communications with owners,
employing reasonable compensation packages that don't compromise
shareholders' earnings, refraining from engaging in insider transactions to
the shareholders' detriment, maximizing shareholders' earnings through such
methods as share repurchases and generally taking consistent action to
maximize the value of the business for its owners.
-SEEK TO PAY A REASONABLE PRICE. The Company will invest in companies where
the investment adviser believes the return on the investment will be
significantly greater than the risk-free rate of return, such as that on
long-term U.S. Government bonds. The investment adviser will consider such
measures of return as the earnings yield and estimated growth rate of
earnings.
-INVEST FOR THE LONG TERM. The objective of the investment adviser in
managing the Company will be to increase wealth in a manner that reduces as
much as possible the risk of permanent -- as opposed to quotational --
loss. The investment adviser will attempt to achieve very large long-term
gains through the creation of business value. The Company will, in general,
hold most investments for at least 5 years, unless changed circumstances
dictate the disposition of the investment. However, the Company may also
take shorter-term positions in stocks of companies in special situations
such as mergers, acquisitions, legal proceedings, spin-offs, liquidations,
bankruptcies, recapitalizations, or the like.
While there is no general limit as to types of securities which can be
purchased, most of the Company's investments are in marketable common stocks or
marketable securities convertible into common stocks. Such securities may be
traded on an exchange or in the over-the-counter market. The Company may also
purchase Restricted Securities. As used herein, the term "Restricted Securities"
means securities the transfer of which is limited by legal or contractual
restrictions. See "Restricted Securities" below, for information regarding the
Company's policies as to such purchases.
TEMPORARY OR DEFENSIVE INVESTMENTS. Securities other than common stock or
securities convertible into common stock may be held from time to time, but the
Company will not normally invest in fixed income securities except for defensive
purposes or to temporarily employ uncommitted cash balances. Such action for
defensive purposes would be taken in the belief that future growth may be at an
unacceptable rate or that there is an undue risk of market decline. While
investment for defensive purposes could reduce the risk of market declines, such
a policy cannot eliminate risk or completely protect against fluctuations in the
value of the Company's assets. The amount invested for defensive purposes and
the length of time which such investments may be maintained will depend
primarily upon the investment adviser's judgment as to market and other
conditions and will not be subject to limitations. The kinds of securities in
which the Company may invest for defensive purposes would include investment
grade corporate debt securities, preferred stocks and U.S. Government
securities, or funds may be retained in cash or cash equivalents. Investment
grade corporate debt securities that are rated in the lowest category of
investment grade may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case for higher grade debt
securities. The Company does not have a policy as to whether it will retain or
dispose of a debt security whose rating
7
<PAGE>
drops below investment grade. Temporary investments of uncommitted cash balances
will be made in U.S. Government securities and investment grade short-term money
market instruments, and short-term securities issued or guaranteed by banks.
FOREIGN SECURITIES. The investment adviser believes that the Company's
investment in foreign securities will be made primarily through the purchase of
the common stock of foreign companies that are traded in the United States or
the purchase of American Depository Receipts ("ADR's"), which are certificates
issued by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank. Investments by the
Company in the common stock of foreign companies which are traded in the United
States or in ADR's may involve considerations and risks that are different in
certain respects from an investment in securities of U.S. companies. Such risks
concerning the direct investment in foreign securities by the Company are
similar to a lesser degree to those described below. The Company also may invest
in selected foreign securities that, in the Adviser's opinion, will enable the
Company to take advantage of additional opportunities that are consistent with
its investment objective of long-term capital appreciation. No more than 20% of
the total assets of the Company may be invested in foreign securities, and the
Company anticipates that under normal circumstances its investments in foreign
securities will range between 5 and 10% of the Company's total assets. Investing
in foreign securities involves certain risks including those set forth below,
which are not typically associated with investing in domestically traded
securities.
In general, the Company will only invest in foreign securities that can be
purchased and sold on foreign stock exchanges or over-the-counter markets. Fixed
commissions and other transaction costs on foreign stock exchanges are generally
higher than negotiated commissions and other such costs on United States
exchanges. There is generally less governmental supervision and regulation of
foreign stock exchanges, brokers and issuers than in the United States. In
addition, foreign stock markets, with certain exceptions, are not as developed
or efficient as those in the United States. Foreign securities often trade with
less frequency and volume than domestic securities and, therefore, tend to be
less liquid and exhibit greater price volatility.
Certain of the foreign securities in which the Company may invest will not
be registered with, nor will the issuers thereof be subject to the reporting
requirements of, the Securities and Exchange Commission. As a result, there may
be less publicly available information about a foreign company or a foreign
security than about a domestic company or a domestically traded security. In
general, foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies.
The custody of foreign securities is generally maintained abroad, and the
costs and risks involved are generally higher than the costs and risks of
maintaining custody of securities in the United States. With respect to some
foreign countries, there may exist the possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could affect
United States investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the United States economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Dividends and interest payable on foreign securities may be subject to
foreign withholding taxes, thereby reducing the net amount of income available
for distribution to stockholders. Certain countries have entered into tax
treaties with the U.S. that reduce the tax on U.S. taxpayers. There is no
assurance, however, that the Company will be able to take advantage of any such
tax treaties or that the Company or its stockholders will ever be able to claim
any foreign tax credit, for U.S. income tax purposes, on account of any such
foreign income taxes. In addition, the dividends received deduction generally
will not be available to either the Company or its shareholders with respect to
dividends received from foreign corporations.
Investments in foreign securities frequently involve currencies of foreign
countries, and because the Company may hold funds in foreign currencies pending
completion of investment programs, the
8
<PAGE>
Company, therefore, may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations including, but not limited
to, action by a foreign government to devalue its currency. There is no
guarantee that the Company or the Adviser will correctly anticipate currency
fluctuations. Accordingly, if the Company's funds are maintained in investments
denominated in foreign currencies during periods when the value of the U.S.
dollar is appreciating relative to those foreign currencies, the Company will
experience losses. The Company will also incur service charges in connection
with each currency conversion.
As a non-diversified investment company, the Company has no specific policy
on diversification of assets nor is it intended that the Company will have any
such policy in the future. However, the Company intends to qualify for tax
treatment as a regulated investment company under the Internal Revenue Code of
1986, as amended (the "Code"). The Company will diversify its assets so that, at
the close of each quarter of its taxable year: (a) at least 50% of the total
value of its assets are represented by cash and cash items, government
securities and other securities with respect to which the Company will not
invest more than 5% of its total assets, at market value, in the securities of
any one issuer or more than 10% of the outstanding voting securities of any one
issuer and (b) not more than 25% of the total value of its assets are invested
in securities of any one issuer or of any two or more issuers controlled by the
Company which, pursuant to the regulations under the Code, may be deemed to be
engaged in the same, similar or related trades or businesses. Changes in the
market value of securities in the Company's portfolio generally will not cause
the Company to cease to qualify as a regulated investment company unless any
failure to satisfy these restrictions exists immediately after the acquisition
of any security or other property and is wholly or partly the result of such
acquisition.
The Company will observe a non-fundamental policy of not investing for the
purpose of exercising control or management, even though it may take substantial
positions in securities of small companies and in certain circumstances this may
result in the acquisition of such control. Such circumstances could arise, for
example, when existing controlling persons of an issuer dispose of their
holdings to larger groups or to the public or where an issuer defaults to the
Company on its obligations pursuant to the provisions of a purchase agreement or
instrument governing the rights of a senior security held by the Company.
NON-FUNDAMENTAL INVESTMENT PRACTICES AND RISKS
In order to achieve its investment objectives, the Company may engage in the
following non-fundamental investment practices.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The Company may purchase
covered put options to protect its portfolio holdings in an underlying security
against a decline in market value. Such hedge protection is provided during the
life of the put option since the Company, as holder of the put option, is able
to sell the underlying security at the put exercise price regardless of any
decline in the underlying security's market price. In order for a put option to
be profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, the Company will reduce any profit
it might otherwise have realized in its underlying security by the premium paid
for the put option and by transaction costs, but it will retain the ability to
benefit from future increases in market value.
The Company may also purchase covered call options to hedge against an
increase in prices of securities it wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Company, as
holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. By using call options in this manner, the Company
will reduce any profit it might have realized had it bought the underlying
security at the time it purchased the call option by the premium paid for the
call option and by transaction costs, but it limits the loss it will suffer if
the security declines in value to such premium and transaction costs.
9
<PAGE>
WRITING COVERED CALL OPTIONS ON SECURITIES. The Company may write covered
call options on optionable securities of the types in which they are permitted
to invest from time to time as determined appropriate in seeking to attain its
objective. Call options written by the Company give the holder the right to buy
the underlying securities from the Company at a stated exercise price.
The Company will receive a premium for writing a covered call option, which
increases the Company's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a covered call option, the
Company limits its opportunity to profit from any increase in the market value
of the underlying security above the exercise price of the option.
The Company may terminate an option that it has written prior to the
option's expiration by entering into a closing purchase transaction in which an
option is purchased having the same terms as the option written. The Company
will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by unrealized appreciation of the underlying security owned by the
Company.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income,
the Company may lend its portfolio securities in an amount up to 33 1/3% of its
total assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. No lending may be made to any companies
affiliated with the Company. The borrower at all times during the loan must
maintain with the lending Company cash or cash equivalent collateral equal in
value at all times to at least 100% of the value of the securities loaned.
During the time portfolio securities are on loan, the borrower pays the Company
any dividends or interest paid on such securities, and the Company may invest
the cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral. The Company will have the right to regain record ownership of loaned
securities to exercise beneficial rights, such as voting rights and subscription
rights. There is the risk of failure by the borrower to return the securities
involved in such transaction.
ILLIQUID SECURITIES. The Company has adopted the following non-fundamental
investment policy, which may be changed by the vote of the Board of Directors.
The Company will not invest in illiquid securities (including restricted
securities) if immediately after such investment more than 15% of the Company's
total assets (taken at market value) would be invested in such securities. This
limitation may be subject to additional restrictions imposed by jurisdictions in
which the Company's shares are offered for sale. For this purpose, illiquid
securities include (a) securities that are illiquid by virtue of the absence of
a readily available market or legal or contractual restrictions on resale, (b)
participation interests in loans that are not subject to puts, and (c)
repurchase agreements not terminable within seven days.
RESTRICTED SECURITIES. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended
("Securities Act"). Securities that have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market.
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In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such investments.
The Securities and Exchange Commission has adopted Rule 144A, which allows a
broader institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the Securities Act applicable to
resales of certain securities to qualified institutional buyers.
As stated above under "Illiquid Securities," the Company may invest up to
15% of its total assets in restricted securities issued under Section 4(2) of
the Securities Act, which exempts from registration "transactions by an issuer
not involving any public offering." Section 4(2) instruments are restricted in
the sense that they can only be resold through the issuing dealer and only to
institutional investors; they cannot be resold to the general public without
registration.
CERTAIN RISKS ASSOCIATED WITH ILLIQUID AND RESTRICTED SECURITIES. The sale
of illiquid and restricted securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. Restricted securities may sell at
a price lower than similar securities that are not subject to restrictions on
resale. The Company may not be able to sell certain restricted or illiquid
securities in a timely manner or the price obtainable upon resale may not be the
anticipated price, especially if adverse market conditions occur during the
interim period.
FUNDAMENTAL AND NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In pursuing its investment objective, the Company's investment activity is
limited by certain policies and investment restrictions. The following
fundamental policies and investment restrictions have been adopted by the
Company and cannot be changed without approval by the vote of a majority of the
outstanding voting securities of the Company, as defined in the Investment
Company Act.
The Company may not:
1. Issue senior securities, except as provided in restriction number 2
below.
2. Borrow money, except that the Company may borrow from banks (including
the Company's custodian bank) and enter into reverse repurchase
agreements as a temporary defensive measure for extraordinary or
emergency purposes, and then only in amounts not exceeding 10% of its
total assets, taken at market value, and may pledge amounts of up to 20%
of its total assets, taken at market value, to secure such borrowings.
For purposes of this restriction, collateral arrangements with respect to
the writing of options, futures contracts, options on futures contracts
and collateral arrangements with respect to initial and variation margin
are not deemed to be a pledge of assets, and neither such arrangements
nor the purchase and sale of options, futures or related options shall be
deemed to be the issuance of a senior security. Whenever bank borrowings
and the value of the Company's reverse repurchase agreements exceed 5% of
the value of the Company's total assets, the Company will not make any
additional purchases of securities for investment purposes.
3. Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Company's total assets, taken at market value, would be
invested in the securities of issuers having their principal business
activities in the same industry. This restriction does not apply to
obligations issued or guaranteed by the U.S. Government or by any of its
agencies or instrumentalities but will apply to foreign government
obligations unless the SEC permits their exclusion.
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4. Make loans, although the Company may (a) purchase money market securities
and enter into repurchase agreements, (b) acquire bonds, debentures,
notes and other debt securities, governmental obligations and
certificates of deposit, and (c) lend portfolio securities.
5. Purchase a security if, as a result, with respect to 50% of the value of
the Company's total assets, taken at market value, (i) more than 5% of
the Company's total assets, taken at market value, would be invested in
the securities of any one issuer (including repurchase agreements with
any one entity), except securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities and (ii) more than
10% of the outstanding voting securities of any issuer would be held by
the Company.
6. Underwrite securities of other persons, except to the extent that the
Company may be deemed to be an underwriter within the meaning of the
Securities Act, in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
7. Purchase or sell real estate or interests in real estate (except that
this restriction does not preclude investments in marketable securities
of companies engaged in real estate activities).
8. Purchase or sell commodities or commodity contracts, except that the
Company may purchase and sell stock index and currency options, stock
index futures, financial futures and currency futures contracts and
related options on such futures.
The following non-fundamental policies and investment restrictions have been
adopted by the Company and cannot be changed without approval by the vote of a
majority of the Board of Directors. The Company may not:
1. Purchase any security on margin, except that the Company may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of portfolio securities. The payment by the Company of initial or
variation margin in connection with futures or related options
transactions shall not be considered the purchase of a security on
margin.
2. Purchase or sell interests in oil, gas or other mineral exploration or
development programs.
REPURCHASE OFFERS
REPURCHASE OFFER POLICIES. The Company has adopted certain repurchase
policies as fundamental policies which may not be changed without the vote of
the holders of a majority of the Company's outstanding voting securities (as
determined under the 1940 Act). The Company will offer to repurchase shares at
annual intervals commencing in February, 1996. The Company will establish a
maximum of fourteen days prior to the deadline for repurchase requests and the
applicable repurchase date such that repurchases of shares may occur on the last
business day of February of each year commencing February 29, 1996. The Board of
Directors is authorized to establish other policies relating to repurchases of
shares that are consistent with the 1940 Act.
REPURCHASE PROCEDURES. Shareholders will be entitled to redeem shares
through the Company's annual offer to repurchase shares. Additional dates for
repurchases of shares may be established by the Board of Directors in its sole
discretion, not more frequently than once every two years. Shares rendered by
shareholders on any repurchase date will be repurchased, subject to the
aggregate repurchase amounts established for any such dates, at the then current
net asset value per share. Repurchase proceeds will be repaid, in cash, within
seven days after each of the Company's repurchase dates (a "Repurchase Payment
Deadline"). The Company may deduct a repurchase fee from the repurchase proceeds
equal to no more than 2% of the proceeds which is intended to compensate the
Company for expenses related to the repurchase offer.
REPURCHASE AMOUNTS. The number of shares that the Company will offer to
repurchase on any repurchase date (the "Repurchase Offer Amount") will be
determined by the Board of Directors, in its sole discretion, but will be at
least 5% and no greater than 25%, of the total number of shares
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outstanding on any such date. Currently, the Board has determined that the
initial repurchase offer will be set at 5%; however, this may change prior to
the date of the repurchase offer at the sole discretion of the Board of
Directors.
ADDITIONAL SALES OF SHARES. The Board of Directors has the right, but not
the obligation, to cause the Company to sell additional shares on the Company's
annual repurchase date. Sales of additional shares may be made to current
shareholders and to qualified investors who are not currently shareholders.
Proceeds from the offering of additional shares may be used to finance the
Company's repurchase offer, to purchase additional portfolio securities or to
reduce the amount of borrowing or indebtedness incurred by the Company. The
purchase price for any such shares shall be the then-current net asset value per
share.
NOTICES. Notice of a discretionary repurchase offer at net asset value will
be given to each shareholder of record between twenty-one (21) and forty-two
(42) days before each repurchase request deadline. Such notice will state the
repurchase offer amount and any fees applicable to such repurchase, the dates of
the repurchase request deadline, repurchase pricing date, and repurchase payment
deadline. Shareholders will be advised of the risk of fluctuation in the net
asset value between the repurchase request deadline and the repurchase pricing
date, and the possibility that the Company may use an earlier repurchase pricing
date under certain circumstances. Procedures by which shareholders may tender
their shares, the procedures by which the Company may repurchase such shares on
a pro rata basis, and the circumstances in which the Company may suspend or
postpone a repurchase offer will be set forth in the notice to shareholders.
Procedures by which shareholders may withdraw or modify their tenders until the
repurchase request deadline will also be set forth in the notice. Finally, the
notice will set forth the net asset value of the shares to be repurchased no
more than seven days before the date of notification, and the means by which
shareholders may ascertain the net asset value thereafter, as well as the market
price of the shares, if any, on the date on which the net asset value was
computed, and the means to determine the market price thereafter.
If shareholders tender more than the repurchase offer amount, the Company
may repurchase an additional amount of stock, not to exceed two percent (2%) of
the shares outstanding on the repurchase request deadline. The Company will
repurchase the shares tendered on a pro rata basis. The Company may, however,
accept all tender offers of shareholders who own less than one hundred shares
and who tender all their shares, before prorating other tender offers, and may
accept stock by lot when tendered by shareholders who tender all their shares
and who elect to have either all or none or at least a minimum amount or none
accepted, if the Company first accepts all shares tendered by shareholders who
do not so elect.
The current net asset value of the Company's shares will be computed daily
on the five business days before a repurchase request deadline, at such times to
be determined by the Board of Directors. During the period from notification to
shareholders of a repurchase pricing date, the Company will maintain liquid
assets in an amount to 100 percent of the repurchase offer amount.
The Company will not suspend or postpone a repurchase offer except pursuant
to a vote of a majority of the directors, including a majority of the directors
who are not "interested persons" of the Company, as defined in the Investment
Company Act. Further, the Company will suspend or postpone a repurchase offer
only if certain regulatory requirements are met. The Company will give
shareholders notice of any such suspension or postponement, and likewise will
give notice of a renewed repurchase offer.
In compliance with the Investment Company Act requirements for periodic
repurchase offers, a majority of the Company's directors are directors who are
not interested persons of the Company and the selection and nomination of such
directors is within the discretion of those directors.
The Company may borrow to fund repurchases of shares. If the Company must
liquidate portfolio securities to purchase shares, the Company may be required
to sell portfolio securities for other than investment purposes and may realize
gains and losses. Gains realized on securities held for less than
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three months may affect the Company's ability to retain its status as a
regulated investment company under the Code, because of the Code's limitation
that the portion of the Company's annual gross income that may be derived from
the sale or disposition of securities held less than three months must be less
than 30%; additionally, such gains may reduce the ability of the Company to sell
other securities held for less than three months that the Company may wish to
sell for investment reasons. That inability may adversely affect the Company's
ability to achieve its investment objective. See "Taxes."
The Company may also make offers to repurchase shares of which it is the
issuer pursuant to any other applicable rules of the SEC, in effect at the time
of the offer.
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
The overall management of the business and affairs of the Company is vested
in the Board of Directors. The Board of Directors approves all significant
agreements between the Company and persons or companies furnishing services to
the Company, including the Company's Advisory Agreement with Hutner Capital
Management, the agreement with The First National Bank of Boston, N.A. as the
custodian and the agreements with Forum Financial Services, Inc. as the
principal underwriter and administrator. The day-to-day operations of the
Company are delegated to the officers, subject always to the objective and
policies of the Company and to the general supervision of the Board of
Directors.
INVESTMENT ADVISER
Hutner Capital Management, an investment adviser registered with the
Securities and Exchange Commission, was incorporated in the State of New York on
February 7, 1995. Daniel Hutner is the sole stockholder of Hutner Capital
Management and serves as the Chairman of the Board and President. Mr. Hutner
also serves as the President of Pulsifer and Hutner Incorporated ("Pulsifer &
Hutner"), an investment adviser registered with the Securities and Exchange
Commission and affiliate of Hutner Capital Management, and is the General
Partner of Avalon Partners, L.P.
Pulsifer & Hutner was established in 1925 by Hale Pulsifer, a pioneer of the
investment counseling business. The firm has grown from a one person office to a
purposely small staff of account managers. Today, Pulsifer & Hutner manages
approximately $100 million in more than 150 accounts, including individuals,
trusts, estates, institutions and pension and profit-sharing funds. Pulsifer &
Hutner is located at 14 Wall Street, New York, New York 10005-2133.
Although Hutner Capital Management has never managed a management investment
company, Daniel Hutner is the General Partner and has managed Avalon Partners,
L.P., a privately placed Delaware limited partnership with investment objectives
that are substantially similar to those of the Company since the partnership's
inception on October 1, 1990. Although not an investment company registered
under the federal securities law with similar fees and expenses, this limited
partnership has been managed by Mr. Hutner using substantially similar, though
not in all cases, identical, investment strategies and techniques as those
contemplated for use by the Company.
Pursuant to the Advisory Agreement, Hutner Capital Management provides to
the Company investment management and financial advisory services, including
causing the purchase and sale of securities in the Company's portfolio subject
at all times to the policies set forth by the Board of Directors. Under the
terms of the Advisory Agreement, Hutner Capital Management supervises all
aspects of the Company's investment operations.
Hutner Capital Management will be paid, pursuant to the Advisory Agreement,
a monthly fee from the Company calculated at an annual rate of 1.0% of its
average weekly net assets. This fee is higher than those charged by most
investment companies. Hutner Capital Management may however, from time to time,
voluntarily agree to defer or waive fees or absorb some or all of the expense of
the
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Company. To the extent that they should do so, they may seek repayment of such
deferred fees and absorbed expenses after this practice is discontinued. The
Board of Directors has determined that it is reasonably possible that the
Company will become large enough to permit such repayments.
The Company's portfolio investment decisions will be provided by Daniel
Hutner. At Pulsifer & Hutner, Mr. Hutner manages both individual and
institutional portfolios specializing in common stock investments. Prior to
joining Pulsifer & Hutner in 1981, Mr. Hutner was engaged in writing and editing
on a wide variety of subjects including business, economics and science for the
National Geographic Society, the Smithsonian Institution, Charles Owens and
Associates, Inc. (publisher of the MONDAY MORNING REPORT) and others. In
addition, Mr. Hutner provided research and consulting services with respect to
various business and economic issues for National Economic Research Associates,
Data Resources, Inc., and the Joint Economic Committee of Congress. Mr. Hutner
graduated from Middlebury College in 1970 with a B.A. in Economics. He also
received his M.A. in English from the University of Virginia in 1973 and his
M.B.A. from New York University in 1984.
Hutner Capital Management has entered into an Investment Research Agreement
with Pulsifer & Hutner. Under the Investment Research Agreement, Pulsifer &
Hutner will provide to Hutner Capital investment research relating to marketable
securities useful to Hutner Capital in the performance of its activities under
the Advisory Agreement. Hutner Capital from time to time will advise Pulsifer &
Hutner as to the amount of the assets of the Company for which Pulsifer & Hutner
may have sub-advisory responsibility, and such responsibility will be limited to
that amount until modified by Hutner Capital. The Investment Research Agreement
provides that, except to the extent expressly authorized by Hutner Capital,
Pulsifer & Hutner has no authority to determine the nature or timing of changes
in the portfolio of the Company or the manner of effecting such changes or to
cause the purchase or sale of portfolio securities. Hutner Capital will delegate
to Pulsifer & Hutner discretionary authority in varying degrees to purchase or
sell portfolio securities for the Company, typically with limitations on maximum
amounts of securities which may be purchased or sold and limitations on maximum
purchase and minimum sale prices, outside of which limitations Pulsifer & Hutner
would be required to consult with Hutner Capital. Hutner Capital Management will
pay Pulsifer & Hutner a monthly fee calculated at an annual rate of 0.25% of the
Company's average weekly assets for which Pulsifer and Hutner has responsibility
for providing research and sub-advisory services.
Prior to the registration of the Company, neither Hutner Capital Management,
Pulsifer & Hutner nor Daniel Hutner have served as the investment adviser or
portfolio manager of a registered management investment company. Therefore, an
investment in the Company may be subject to a certain degree of additional risk
because of the relative, collective inexperience of Hutner Capital Management,
as the Company's adviser, Pulsifer & Hutner, as a provider of investment
research to the Adviser and Daniel Hutner, in his capacity as the portfolio
manager.
ADMINISTRATOR, DISTRIBUTOR, TRANSFER AGENT AND DIVIDEND PAYING AGENT
Forum Financial Services, Inc. ("Forum") supervises administration of the
Company pursuant to an Administration Agreement with the Company and serves as
the Company's distributor pursuant to a Distribution Agreement. Forum and Forum
Financial Corp. ("FFC"), the Company's distributor, transfer agent and dividend
paying agent, are members of the Forum Financial Group of companies, and
together provide a full range of services to the investment company and
financial services industry. As of the date of this prospectus, Forum acted as
administrator and distributor of registered investment companies with assets of
approximately $10.5 billion. Forum, whose address is Two Portland Square,
Portland, Maine 04101, is a registered broker-dealer and investment adviser and
is a member of the National Association of Securities Dealers, Inc. As of the
date of this Prospectus, Forum and Forum Financial Corp. are controlled by John
Y. Keffer.
Under the Administration Agreement, Forum supervises the administration of
all aspects of the Company's operations, including the Company's receipt of
services for which the Company is obligated to pay, provides the Company with
general office facilities and provides, at the Company's expense, the services
of persons necessary to perform such supervisory, administrative and clerical
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functions as are needed to effectively operate the Company. Those persons, as
well as certain employees and Directors of the Company, may be directors,
officers or employees of Forum and its affiliates. For these services and
facilities, Forum receives a fee computed and paid monthly at an annual rate of
.25% of the average weekly net assets of the Company, subject to an annual
minimum fee of $25,000.
FFC, a registered transfer agent, acts as the Company's transfer agent and
dividend disbursing agent. FFC maintains an account for each shareholder of the
Company (unless such accounts are maintained by sub-transfer agents or
processing agents) and performs other transfer agency and related functions. For
these services, FFC will receive an annual fee of $12,000 plus account charges.
The Company will also reimburse FFC for certain expenses incurred on behalf of
the Company.
FFC is authorized to subcontract any or all of its functions to one or more
qualified sub-transfer agents, shareholder servicing agents, or processing
agents, who may be affiliates of FFC, and who agree to comply with the terms of
FFC's agreement with the Company. Among the services provided by such agents are
answering customer inquiries regarding account matters; assisting shareholders
in designating and changing various account options; aggregating and processing
purchase orders and transmitting and receiving funds for shareholder orders;
transmitting, on behalf of the Company, proxy statements, prospectuses and
shareholder reports to shareholders and tabulating proxies; processing dividend
payments and providing sub-accounting services for Company shares held
beneficially; and providing such other services as the Company or a shareholder
may request. FFC may pay these agents for their services, but no such payment
will increase FFC's compensation from the Company.
CUSTODIAN
The First National Bank of Boston, N.A., whose address is 150 Royall Street,
Canton, Massachusetts 02021, is custodian for the securities and cash of the
Company.
EXPENSES
The Company will bear the expenses of its offering, which are estimated to
be $129,000.00, including legal and accounting fees relating to its organization
and the costs of preparing solicitation materials. Organizational expenses will
be capitalized and amortized over a period of five years. In addition to the
expenses to be paid to the investment adviser, administrator, transfer agent,
dividend paying agent and custodian discussed within this prospectus, the
Company will pay all other ongoing expenses, including but not limited to legal
fees, accounting fees for preparation of financial statements and tax returns,
annual audits, brokerage commissions, transfer taxes and other clearing,
settlement and transactional charges.
PLAN OF DISTRIBUTION
The common stock of the Company will be offered and sold by the Company to
the public at $10.00 per share. Investors must pay for the securities by October
31, 1995. No arrangement has been made to place funds received in an escrow,
trust, or similar arrangement.
AUTOMATIC DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
All shareholders of the Company may elect to become participants in the
Automatic Dividend Reinvestment and Cash Purchase Plan (the "Plan") by
completing and signing a form of authorization. The authorization must be signed
by the registered shareholders of an account. Participation is voluntary and may
be terminated or resumed at any time upon written notice from the participant
received by the Bank of Boston, the Plan Agent, prior to the record date of the
next dividend. Additional information regarding the election may be obtained
from the Company.
Dividend payments and other distributions to be made by the Company to
participants in the Plan either will be paid to the Plan Agent in cash (which
then must be used to purchase shares in the open market) or will be represented
by the delivery of shares depending upon which of the two options would be the
most favorable to participants, as hereafter determined. On each date on which
the
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Company determines the net asset value of the shares (a "Valuation Date"), and
which occurs not more than five business days prior to a date fixed for payment
of a dividend or other distribution from the Company, the Plan Agent will
compare the determined net asset value per share with the market price per
share. For all purposes of the Plan, "market price" shall be deemed to be the
highest price bid at the close of the market by any market maker on the date
which coincides with the relevant Valuation Date, or, if no bids were made on
such date, the next preceding day on which a bid was made. If the net asset
value in any such comparison is found to be lower than said market price, the
Plan Agent will demand that the Company satisfy its obligation with respect to
any such dividend or other distribution by issuing additional shares to the
Participants in the Plan at a price per share equal to the greater of the
determined net asset value per share or ninety-five percent (95%) of the market
price per share determined as of the close of business on the relevant Valuation
Date. However, if the net asset value per share (as determined above) is higher
than the market price per share, then the Plan Agent will demand that the
Company satisfy its obligation with respect to any such dividend or other
distribution by a cash payment to the Plan Agent for the account of Plan
Participants and the Plan Agent then shall use such cash payment to buy
additional shares in the "open market" for the account of the Plan participants,
provided, however, that the Plan Agent shall not purchase shares in the "open
market" at a price in excess of the net asset value as of the relevant Valuation
Date. In the event the Plan Agent is unable to complete its acquisition of
shares to be purchased in the "open market" by the end of the first trading day
following receipt of the cash payment from the Company, any remaining funds
shall be used by the Plan Agent to purchase newly issued shares of the Company's
common stock from the Company at the greater of the determined net asset value
per share or ninety-five (95%) percent of the market price per share as of the
date coinciding with or next preceding the date of the relevant Valuation Date.
Participants in the Plan will also have the option of making additional cash
payments to the Plan Agent, on a monthly basis, for investment in the Company's
shares. Such payments may be made in any amount from a minimum of $50.00 to a
maximum of $1,000.00 per month. The Company may, in its discretion, waive the
maximum monthly limit with respect to any participant. At the end of each
calendar month, the Plan Agent will determine the amount of funds accumulated.
Purchases made from the accumulation of payments during any one calendar month
will be made on or about the first business day of the following month
("Investment Date"). The funds will be used to purchase shares of the Company's
common stock from the Company. If the net asset value of the shares is lower
than the market price as of the Valuation Date which occurs not more than five
business days prior to the relevant Investment Date, such shares will be newly
issued shares and will be issued at a price per share equal to the greater of
the determined net asset value per share or ninety-five percent (95%) of the
market price per share. If the net asset value per share is higher than the
market price per share, then the Plan Agent shall use such cash payments to buy
additional shares in the "open market" for the account of the Plan Participants,
provided, however, that the Plan Agent shall not purchase shares in the "open
market" at a price in excess of the net asset value as of the relevant Valuation
Date. In the event that the Plan Agent is unable to complete its acquisition of
shares to be purchased in the "open market" by the end of the Investment Date,
any remaining cash payments shall be used by the Plan Agent to purchase newly
issued shares of the Company's common stock from the Company at the greater of
the determined net asset value per share or ninety-five (95%) percent of the
market price per share as of the relevant Valuation Date. All cash payments
received by the Plan Agent in connection with the Plan will be held without
earning interest. To avoid unnecessary cash accumulations, and also to allow
ample time for receipt and processing by the Plan Agent, participants that wish
to make voluntary cash payments should send such payments to the Plan Agent in
such a manner that assures that the Plan Agent will receive and collect Federal
Funds by the end of the month. This procedure will avoid unnecessary
accumulations of cash and will enable participants to realize lower brokerage
commissions and to avoid additional transaction charges. If a voluntary cash
payment is not received in time to purchase shares in any calendar month, such
payment shall be invested on the
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next Investment Date. A participant may withdraw a voluntary cash payment by
written notice to the Plan Agent if the notice is received by the Plan Agent at
least forty-eight hours before such payment is to be invested by the Plan Agent.
Forum will perform bookkeeping and other administrative functions, such as
maintaining all shareholder accounts in the Plan and furnishing written
confirmation of all transactions in the account, including information needed by
shareholders for personal and tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in noncertificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan and of record as of the record date for
determining those shareholders who are entitled to vote on any matter involving
the Company. In case of shareholders such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time to
time by such shareholders as representing and limited to the total number of
shares registered in the shareholder's name and held for the account of
beneficial owners who have elected to participant in the Plan.
There are no special fees or charges to participants other than reasonable
transactions fees, which shall not exceed the lesser of five percent (5%) of the
amount reinvested or three ($3.00) dollars and a termination fee of up to one
($1.00) dollar.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge three ($3.00) dollars, plus a pro rata share of the brokerage
commissions, if any. Brokerage charges for purchasing small blocks of stock for
individual accounts through the Plan are expected to be less than the usual
brokerage charges for such transactions, as the Plan Agent will be purchasing
shares for all participants in larger blocks and prorating the lower commission
rate thus applied.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax liability associated therewith.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Company reserves the right to amend or terminate the Plan as
applied to any voluntary cash payment received and any dividend or distribution
to be paid subsequent to a date specified in a notice of the change sent to all
shareholders at least ninety days before such specified date. The Plan may also
be terminated on at least ninety days' written notice to all shareholders in the
Plan.
NET ASSET VALUE
The net asset value per share is determined as of the close of the last
business day of the NYSE in each week, by dividing the value of the Company's
portfolio securities plus all cash and other assets (including dividends accrued
but not collected) less all liabilities (including accrued expenses but
excluding capital and surplus) by the number of shares outstanding. In
accordance with generally accepted accounting principles for investment
companies, dividend income is accrued on the ex-dividend date. The net asset
value per share will be made available for publication.
Each security will be valued on the basis of the last sale price on the
valuation date on the principal exchange on which the security is traded or the
National Association of Securities Dealers Automated Quotation National Market
System. With respect to those securities for which no trades have taken place
that day and unlisted securities for which market quotations are readily
available, the value shall be determined by taking the mean between the latest
"bid" and "asked" prices. Securities for which quotations are not readily
available and other assets will be valued at fair value as determined in good
faith by the Board of Directors. Notwithstanding the above, any short-term debt
securities with maturities of 60 days or less are valued at amortized cost.
CAPITAL STOCK OF THE COMPANY
The Company is authorized to issue 100 million shares of capital stock, par
value $.001 per share ("Capital Stock"). Each share of Capital Stock has equal
voting, dividend, distribution and liquidation
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rights. The shares of Capital Stock offered hereby, when issued and paid for
pursuant to the terms of this Offer, will be fully paid and non-assessable. The
shares of Capital Stock are not redeemable and have no preemptive, conversion or
cumulative voting rights.
The Company's Articles of Incorporation provide that under certain
conditions the affirmative vote of at least three-quarters of the outstanding
voting stock is required: (i) to convert the Company into an open-end company;
(ii) to approve any proposal to dissolve, merge or consolidate the Company;
(iii) to sell its assets or (iv) to effect any amendment to the Articles of
Incorporation to make the Capital Stock a redeemable security (as well as to
amend any of the foregoing provisions). In addition, the Articles of
Incorporation provide that the Board of Directors is to consist of three classes
of directors. During a three year cycle, two directors will be elected in the
first year, another two directors will be elected in the second year, and one
director will be elected in the third year. These provisions and others in the
Articles of Incorporation make it more difficult for a third party to obtain
control of the Company. A copy of the Articles of Incorporation may be obtained
from the Securities and Exchange Commission.
The Company may offer additional shares in accordance with its Repurchase
Offers and additional shares may be issued under the Plan. See "Repurchase
Offers" and "Automatic Dividend Reinvestment and Cash Purchase Plan." Other
offerings of shares, if made, will require approval of the Company's Board of
Directors. Any additional offering will be subject to the requirement of the
1940 Act that shares not be sold at a price below the then current net asset
value (exclusive of underwriting discounts and commissions) except in connection
with an offering to existing shareholders or with the consent of a majority of
the Company's outstanding shares.
SPECIAL VOTING PROVISIONS
The Company has provisions in its Articles of Incorporation and Bylaws that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Company, to cause it to engage in certain transactions or
to modify its structure. Commencing with the first annual meeting of
stockholders, the Board of Directors will be divided into three classes having
initial terms of one, two and three years, respectively. At the annual meeting
of stockholders in each year thereafter, the term of one class will expire and
directors will be elected to serve in that class for terms of three years. This
provision could delay for up to two years the replacement of a majority of the
Board of Directors. A director may be removed from office only by a vote of the
holders of at least 75% of the shares of the Company entitled to be voted on the
matter.
In addition, conversion of the Company from a closed-end to an open-end
investment company requires the affirmative vote of at least 75% of the
directors and of the holders of 75% of the shares of the Company unless approved
by at least 75% of the Continuing Directors, as defined below, in which case a
majority of the votes entitled to be cast by shareholders of the Company will be
required to approve such conversion. If the Company were to be converted into an
open-end investment company, it could be restricted in its ability to redeem its
shares (otherwise than in kind) because, in light of the limited depth of the
markets for certain securities in which the Company may invest, there can be no
assurance that the Company could realize the then market value of the portfolio
securities the Company would be required to liquidate to meet redemption
requests.
The affirmative votes of at least 75% of the directors and the holders of at
least 75% of the shares of the Company are required to authorize any of the
following transactions:
(i) merger, consolidation or share exchange of the Company with or into
any other person;
(ii) issuance or transfer by the Company (in one or a series of
transactions in any 12-month period) of any securities of the Company
to any other person or entity for cash, securities or other property (or
combination thereof) having an aggregate fair market value of $1,000,000 or
more, excluding sales of securities of the Company in connection with a
public offering, issuances of
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securities of the Company pursuant to a dividend reinvestment plan adopted
by the Company or pursuant to a stock dividend and issuances of securities
of the Company upon the exercise of any stock subscription rights
distributed by the Company;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Company (in one or a series of transactions in any
12-month period) to or with any person of any assets of the Company having
an aggregate fair market value of $1,000,000 or more, except for portfolio
transactions effected by the Company in the ordinary course of its business
and except with respect to repurchases or redemptions of shares of the
Corporation (transactions within clauses (i) and (ii) and this clause (iii)
each being known individually as a "Business Combination");
(iv) any proposal as to the voluntary liquidation or dissolution of the
Company or any amendment to the Company's Articles of Incorporation
to terminate its existence; and
(v) any shareholder proposal as to specific investment decisions made or
to be made with respect to the Company's assets.
However, in the case of a Business Combination described in (i) and (iii)
above, a 75% shareholder vote will not be required if the transaction is
approved by a vote of at least 75% of the Continuing Directors (as defined
below). In such case, a majority of the votes entitled to be cast by
shareholders of the Company will be required to approve such transaction. In
addition, a 75% shareholder vote will not be required with respect to a
transaction described in clause (iv) above if it is approved by a vote of at
least 75% of the Continuing Directors (as defined below), in which case a
majority of the votes entitled to be cast by shareholders of the Company will be
required to approve such transaction. The Company's By-laws contain provisions
the effect of which is to prevent matters, including nominations of directors,
from being considered at shareholders' meetings where the Company has not
received sufficient prior notice of the matters.
Reference is made to the Articles of Incorporation and By-laws of the
Company, on file with the Securities and Exchange Commission, for the full text
of these provisions. See "Further Information." These provisions could have the
effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Company in a tender offer or similar transaction. In
the opinion of the Board of Directors, however, these provisions offer several
possible advantages. They may require persons seeking control of the Company to
negotiate with its management regarding the price to be paid for the shares
required to obtain such control, they promote continuity and stability and they
enhance the Company's ability to pursue long-term strategies that are consistent
with its investment objectives. The Board of Directors has determined that the
foregoing voting requirements, which are generally greater than the minimum
requirements under Maryland law and the 1940 Act, are in the best interests of
shareholders generally.
A "Continuing Director" is any member of the Board of Directors of the
Company (i) who is not a person or affiliate of a person who enters or proposes
to enter into a Business Combination with the Company (such person or affiliate,
being an "Interested Party") and (ii) who has been a member of the Board of
Directors of the Company for a period of at least 12 months (or since the
commencement of the Company's operations, if less than 12 months), or is a
successor of a Continuing Director who is unaffiliated with an Interested Party
and is recommended to succeed a Continuing Director by a majority of the
Continuing Directors then on the Board of Directors of the Company.
TAXES
The Company intends to qualify as a "regulated investment company" for
federal income tax purposes. In order to be taxed as a regulated investment
company, the Company must meet a number of requirements, including the
requirements with respect to diversification of assets, distribution of income
and sources of income.
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Shareholders may be proportionately liable for taxes on income and gains of
the Company. Distributions by the Company of its net investment income, and the
excess, if any, of its net short-term capital gain over its net long-term
capital loss will be taxable to shareholders as ordinary income. Distributions
by the Company of the excess, if any, of its net long-term capital gain over its
net short-term capital loss will be designated as capital gain dividends and
will be taxable to shareholders as long-term capital gains, regardless of the
length of time shareholders have held their shares. If the Company fails to
qualify as a regulated investment company, it will be taxed at regular corporate
tax rates on all its taxable income (including capital gains) without any
deduction for distributions to shareholders, and distributions to shareholders
will be taxable as ordinary dividends (even if derived from the Company's net
long-term capital gains) to the extent of the Company's current and accumulated
earnings and profits.
It is the Company's policy to distribute to shareholders all of its
investment income (net of expenses) and any capital gains (net of capital
losses) in accordance with the requirements imposed by the Code. The Company
may, however, subject to the review of the Board of Directors, retain the net
realized long-term capital gains of the Company. In such event, the taxes
thereon would be paid by the Company and appropriate credit allowed to the
shareholders of the Company, pursuant to section 852(b)(3)(D) of the Code.
A statement setting forth the Federal income tax status of all distributions
made (or deemed made) during the year will be sent to shareholders promptly
after the end of each year.
OFFERS TO REPURCHASE SHARES. A shareholder who, pursuant to a repurchase
offer, tenders all shares owned or considered owned by such shareholder will
realize a taxable gain or loss depending upon the shareholder's basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term depending upon the shareholder's holding period for the shares. If a
tendering shareholder tenders less than all shares owned by and attributed to
such shareholder (or if the Company purchases only some of the shares tendered
by a shareholder), and if the distribution to such shareholder does not
otherwise qualify as an exchange, the proceeds received will be treated as a
dividend, return of capital or capital gain depending on the Company's earnings
and profits and the shareholder's basis in the tendered shares. There is a risk
that shareholders may be considered to have received a deemed distribution as a
result of the repurchase by the Company of tendered shares and that such
distribution may be taxable as a dividend in whole or in part.
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TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Management............................................................................. 2
Investment Adviser and Investment Advisory Agreements.................................. 3
Portfolio Transactions and Brokerage................................................... 7
Allocation of Investments.............................................................. 8
Tax Matters............................................................................ 8
General Information.................................................................... 13
Financial Statements................................................................... 14
</TABLE>
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No dealer, salesperson or any other person has been authorized to give
information or make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus, and if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the selling agents. This Prospectus does not constitute an
offer to sell, or a solicitation by anyone in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
<PAGE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary............................. 2
Special Risk Considerations.................... 4
Summary of the Company's Expenses.............. 5
The Company and Its Objectives, Policies and
Risks......................................... 6
Management of the Company...................... 14
Plan of Distribution........................... 16
Automatic Dividend Reinvestment and Cash
Purchase Plan................................. 16
Net Asset Value................................ 18
Capital Stock Of The Company................... 18
Taxes.......................................... 20
</TABLE>
INVESTOR INFORMATION: (207) 879-0001
INVESTMENT ADVISER
Hutner Capital Management, Inc.
14 Wall Street
New York, New York 10005
ADMINISTRATOR AND DISTRIBUTOR
Forum Financial Services, Inc.
Two Portland Square
Portland, Maine 04101
CUSTODIAN
The First National Bank of Boston, N.A.
150 Royall Street
Canton, Massachusetts 02021
LEGAL COUNSEL
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281-1414
3,000,000 SHARES
AVALON CAPITAL, INC.
COMMON STOCK
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PROSPECTUS
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[LOGO]
FORUM FINANCIAL SERVICES, INC.
DISTRIBUTOR
SEPTEMBER 22, 1995
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